PC price war hits retailers

CBS.MarketWatch.com

NEW YORK (CBS.MW) -- Home computers have become the retailers hot potato. As the PC price war plays out in the malls, it seems the less stores have stocked, the better.

Take Minneapolis-based electronics retailer Best Buy Co. (BBY
BBY, -0.63%
). The chain brushed past analysts? expectations on Thursday for its fiscal fourth quarter Thursday, reporting record earnings of $64 million, or $1.29 per diluted share, besting the First Call consensus of $1.27.

"They are doing a bit better than expected," said retail analyst Ira Hersch of Fourteen Research. "They are definitely on the way back up.

"Their store remodeling is going very well. They are trying to create a consumer electronics environment that?s not just computers," he added. "It looks to me that they are reducing their exposure to computers."

Best Buy shares fell Thursday after an early gain. A competitor in computers, CompUSA (CPU
CPU, +1.58%
), saw its stock drop 5 3/16 to 20 13/16 Wednesday after warning that the lower-than-expected PC prices would hurt its fiscal third quarter earnings.

Indeed, Best Buy CEO Richard Schulze said that "the introduction of our new digital ?high-touch? sales area dedicated to DSS, cellular phone, handheld PCs, digital camera and Webtv contributed to the continued strengthening of gross profit margins.

"The success of this new area," he added, "reflects the strength of our store concept to market new technology." PC price wars

"The markets are keeping a close eye on computer merchants," said First Union?s Mark Vitner. "The sharp drop in PC prices has put them to the test." Analysts are watching office supply retailers like Office Depot Inc. (ODP
ODP, -1.35%
), Staples Inc. (SPLS
SPLS, +0.10%
) and Office Max Inc. (OMX
OMXS30, +0.93%
) for the knock-on effect as well, he said.

CS First Boston analyst Rebecca Yarchover on Wednesday downgraded CompUSA to a hold after the chain?s third quarter same sales store growth of $1.45 billion or 1.2 percent came in lower than her expectation of 3 percent growth.

"A tough competitive environment, de-leveraging of fixed costs, and significant investments in the business will probably continue to drag earnings lower the remainder of this fiscal year and into next fiscal year," Yarchover reported.

"We think the stock will be a market performer until we can get a clearer picture of CPU's opportunities for growth and expense leverage over the longer-term," she added.

CompUSA Halpin on Wednesday said that the company is "now carefully examining each area of our business and will maintain a cautious outlook over the next few quarters."

Some 40 percent of the company?s revenues stem from its corporate, government and educational sales and its training programs.

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